It has been about a month since the last earnings report for Merck (MRK Quick QuoteMRK - Free Report) . Shares have added about 4.3% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Merck due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Beats on Q2 Earnings and Sales, Ups 2023 View

Merck reported an adjusted loss of $2.06 per share for second-quarter 2023, narrower than the Zacks Consensus Estimate of a loss of $2.17. In the year-ago period, the company reported adjusted earnings of $1.87. The reported loss was due to a one-time charge of $4.02 per share related to the acquisition of Prometheus Biosciences, completed in June.

Including acquisition and divestiture-related costs, restructuring costs, income and losses from investments in equity securities and certain other items, loss per share was $2.35. In the year-ago period, Merck reported earnings of $1.55.

Revenues rose 3% year over year (7% on a constant currency basis) to $15.04 billion. Sales beat the Zacks Consensus Estimate of $14.39 billion.

Excluding Lagevrio, total revenues rose 17%. Excluding the negative impact of Lagevrio and foreign exchange, total revenues rose 14%.

Strong sales of Keytruda and Gardasil vaccine drove the top line in the quarter.

Quarter in Detail

The Pharmaceutical segment generated revenues of $13.46 billion, up 6% (8% excluding Fx impact) year over year, as higher sales of oncology drugs and vaccines more than offset the lower sales of Merck’s COVID-19 drug, Lagevrio (molnupiravir) and diabetes medicines. Excluding Lagevrio, Pharmaceutical sales grew 14%, driven by oncology and vaccine products.

Keytruda generated sales of $6.3 billion in the quarter, up 19% (21% excluding Fx impact) year over year. Keytruda sales gained from continued strong momentum in metastatic indications, including in some types of NSCLC, renal cell carcinoma, head and neck squamous cell carcinoma, TNBC and MSI-H cancers, and rapid uptake across recent earlier-stage launches. Keytruda sales beat the Zacks Consensus Estimate of $5.87 billion and our estimate of $5.69 billion.

In the United States, Keytruda demonstrated strong growth across all types of cancers, including uptake from launches in earlier-stage cancers, including high-risk early stage TNBC, renal cell carcinoma and melanoma. In outside U.S. market, growth continues to be driven by metastatic indications, including non-small cell lung cancer, head and neck cancer and renal cell carcinoma as well as newly approved earlier-stage indications.

Merck expects Keytruda’s year-over-year growth rate to moderate in the second half due to a slowdown in launches and continued pricing headwinds. In addition, sales in the second quarter benefited from the favorable timing of a wholesaler purchase in the United States that is expected to reverse in the third quarter.

Alliance revenues from Lynparza and Lenvima also boosted oncology sales in the quarter.

Alliance revenues from Lynparza increased 13% (15%, excluding Fx impact) year over year to $310 million in the quarter, driven by increased demand in some international markets, particularly Europe and Japan. Lenvima alliance revenues were $242 million, up 5% from the year-ago period’s levels. New drug, Welireg, launched in 2021, recorded sales of $50 million compared with $42 million in the previous quarter.

In the hospital specialty portfolio, neuromuscular blockade medicine, Bridion injection generated sales of $502 million in the quarter, up 18% year over year, driven by increased demand and market share. Prevymis recorded sales of $143 million, up 39% year over year. Bridion’s patent in the EU expired in July 2023. Sales in EU are expected to decline in future periods.

In vaccines, sales of HPV vaccines — Gardasil and Gardasil 9 — rose 47% year over year to $2.46 billion, driven by strong global demand, particularly in China. Sales in China are benefiting from the expanded indication of Gardasil 9 for girls and women 9 to 45 years of age. Gardasil sales beat the Zacks Consensus Estimate of $1.99 billion and our estimate of $1.71 billion.

Revenue growth in 2023 is expected to be higher than 2022 levels. However, the rate of growth in the second half is expected to be less than the first half due to the timing of shipments in China.

Proquad, M-M-R II and Varivax vaccines recorded combined sales of $582 million, up 1% year over year. Sales of the rotavirus vaccine, Rotateq were down 25% to $131 million while Pneumovax 23 (pneumococcal vaccine polyvalent) vaccine sales declined 40% to $92 million. Sales of Vaxneuvance, Merck’s new pneumococcal 15-valent conjugate vaccine, were $168 million compared with $106 million in the previous quarter, driven by continued uptake in the pediatric patient population following its launch in the United States in 2022.

Januvia/Janumet (diabetes) franchise sales declined 30% year over year to $864 million. The drug’s sales were hurt by lower demand and pricing in the United States and generic competition in certain international markets, mainly Europe. The drugs lost market exclusivity in China in July and the European Union in September last year.

Lagevrio (molnupiravir) generated sales of $203 million during the second quarter, down 83% year over year. Lower sales in Japan and no sales in the United Kingdom hurt Lagevrio sales. Lagevrio sales were better than the Zacks Consensus Estimate of $155 million but missed our estimates of $221 million.

The Animal Health segment generated revenues of $1.46 billion, down 1% year over year (up 2% excluding Fx impact). Animal Health segment sales missed the Zacks Consensus Estimate of $1.55 billion.

Sales of companion animal products rose 1% (up 2% excluding currency) to $649 million due to higher pricing, including the Bravecto line of products, which offset the impact of supply challenges for some vaccines. Sales of livestock products declined 2% to $807 million. However, excluding currency, sales rose 2% due to higher pricing and higher demand for swine and poultry products, partially offset by lower demand for ruminant products.

Margin Discussion

Adjusted gross margin was 76.6%, up 190 basis points year over year, driven by the favorable impact of product mix due to lower sales of Lagevrio, which is a low-margin product.

Adjusted selling, general and administrative (SG&A) expenses were $2.6 billion in the reported quarter, up 8% year over year due to higher administrative costs and higher promotional spending.

Adjusted research and development (R&D) spending was $13.3 billion compared with $2.8 billion in the year-ago period due to a one-time charge of $10.2 billion related to the acquisition of Prometheus Biosciences.

Excluding the charge related to the acquisition of Prometheus Biosciences, operating expenses grew 10%.

2023 Guidance

Merck tightened its revenue guidance range for the year. Merck expects revenues to be in the range of $58.6-$59.6 billion in 2023 compared with $57.7-$58.9 billion previously.

This range reflects strong underlying year-over-year revenue growth of 10% to 11%, offset by the expected lower sales of Lagevrio. Lagevrio is expected to generate $1.0 billion in sales in 2023, a significant decline from $5.7 billion in 2022.

Adjusted EPS is now expected to be between $2.95 and $3.05 after accounting for a charge of $4.02 per share for the Prometheus acquisition. The new guidance also includes incremental financing costs (14 cents per share) related to Prometheus and incremental impact for currency (2 cents per share).

Previously, the company expected adjusted EPS to be between $6.88 and $7.00, which excluded Prometheus. Had the prior guidance included the $4.02 one-time charge and an estimated 14 cents to advance the assets and financing costs, it would have been $2.72 to $2.84, which is higher than the new guidance due to better than expected business performance.

Adjusted operating costs are expected to be in the range of $34.0 to $34.6 billion compared with the prior expectation of $23.3 to $24.1 billion. The adjusted tax rate is now expected to be approximately 30.5% to 31.5% compared with the previous expectation of 17% to 18%, reflecting an increase due to the Prometheus transaction of approximately 15 percentage points.

The guidance includes a negative impact from foreign exchange of approximately 2% on sales and 5% (previously 4%) on earnings.

The adjusted gross margin is expected to be approximately 77% (maintained).

The cost guidance includes $11.6 billion of acquisition and upfront collaboration research and development expenses associated with Prometheus, Imago and Kelun.

Other Income is anticipated to be approximately $100 million.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended downward during the past month.

VGM Scores

Currently, Merck has a subpar Growth Score of D, however its Momentum Score is doing a bit better with a C. Following the exact same course, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions looks promising. Notably, Merck has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

Performance of an Industry Player

Merck belongs to the Zacks Large Cap Pharmaceuticals industry. Another stock from the same industry, Sanofi (SNY Quick QuoteSNY - Free Report) , has gained 5.2% over the past month. More than a month has passed since the company reported results for the quarter ended June 2023.

Sanofi reported revenues of $10.85 billion in the last reported quarter, representing a year-over-year change of +0.7%. EPS of $0.95 for the same period compares with $0.92 a year ago.

For the current quarter, Sanofi is expected to post earnings of $1.42 per share, indicating a change of -2.1% from the year-ago quarter. The Zacks Consensus Estimate has changed -1.2% over the last 30 days.

The overall direction and magnitude of estimate revisions translate into a Zacks Rank #3 (Hold) for Sanofi. Also, the stock has a VGM Score of B.